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Accenture’s (ACN US; NOT RATED) 2QFY23 results should calm some nerves in an increasingly uncertain environment. Record bookings (+17% YoY in CC terms), healthy pipeline and increase in the lower end of organic growth guidance (from 5.5% to 6%) imply that demand environment, though weak, may not have worsened. 3Q and full year guidance now imply growth to decelerate in 3Q (3-7% YoY CC) before picking up in 4Q (4-12%), as growth recovery in consulting is pushed out. This growth trajectory is in-line with growth guidance of other global SI’s (Feb-Pivot?, 27-Feb-23). Managed services– a more relevant segment for India IT Services’ peers – however was resilient with 32% YoY bookings (highest ever) and 16% YoY CC revenue growth. One should however be wary of extrapolating ACN's results to Indian IT players as this might reflect the strength of ACN's scale and its vantage position in advisory-led cost takeout/vendor consolidation scenarios rather than broader demand. It however strengthens the argument that diversified players with scale are better bets to navigate the current demand uncertainty.

* Managed Services holds sway: ACN's 2QFY23 revenue growth (+9% YoY in CC terms) was, once again, driven by outsourcing (+16%) while consulting dragged (+4%) – reflecting non-discretionary demand environment. Although 2Q consulting weakness was flagged off last quarter itself, management indicated that growth will pick up only in 4Q or later (vs. a 2H pick-up expectation earlier). However, managed services’ growth, led largely by cost efficiency projects, is likely to stay healthy.

* Order Booking – in spite of the macro: ACN reported order booking of USD 22.1bn (+17% YoY in CC terms), highest ever, with consulting/managed-services bookings growing 2%/36% YoY (CC). Managed services bookings were led largely by efficiency driven projects as most clients are focussed on cost takeout and shorter term ROI. Vendor consolidation, though present, is not a dominant theme yet, as per the management. Consulting bookings were driven by cloud transformation deals even as the shorter term (more discretionary) deals remain under pressure. The company indicated that 3Q bookings could be lighter from 2Q levels though managed services’ bookings is likely to stay strong.

* Growth outlook steady; BFSI core demand intact: ACN narrowed its full year CC revenue guidance from 8-11% to 8-10% implying 3Q growth of 3-7% and 4Q guidance of 4- 12% (at mid-point of 3Q guidance). However, the company now expects inorganic growth contribution of 2% versus 2.5% earlier suggesting lower end of the organic growth guidance has been upped by 50bps. Further, growth deceleration in 3Q ties in with the commentary of other GSIs (EPAM, DAVA, GLOB) which indicated a soft 1QCY23 before growth picks up. On BFSI, though management indicated it is too early to assess impact of recent events, they don’t see any red flags yet, at least on the larger bank side.

* Getting back in shape – a blue print for Indian IT as well: ACN is cutting 19,000 employees (2.5% of its workforce) – equally split between billable and corporate resources. Management indicated that this is part of a proactive rationalisation exercise to correct the structurally higher cost base due to compounding wage inflation witnessed over the past two years. Importantly, they said that this does not reflect demand weakness. It however does indicate pressure on margins, exacerbated likely by higher share of large deals and relatively lower growth, in our view. We see such action as necessary for India IT players as well as a slower growth and falling inflation makes utilisation and pyramid correction difficult levers to pull.

* Read through for Indian IT: Cost efficiency driven large programs and higher pressure on short term discretionary projects suggest scale players are likely better placed in the current environment. That said, we would be wary of extrapolating ACN’s strong results. Uncertainty around BFSI could cloud near-term visibility for most players, and thus stock performance. Though we see a relief rally post recent correction in NIFTY-IT (-8% in past one month), more evidence are needed for it to sustain.

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